Behind Silicon Valley’s Top VC Firm With Sequoia’s Pat Grady

When it comes to a list of the top Venture Capital firms in the world, there’s usually one name on top of the list:

Sequoia Capital.

Sequoia has been an early investor in hypergrowth companies like Airbnb, Dropbox, Stripe, and Google (and recently joined Drift as an investor in our Series B).

And on this episode of Seeking Wisdom, we’re joined by Sequoia’s Pat Grady. Pat is an investor in Drift, and this year was on the Forbes Midas Brink list as one of the top VC’s to watch over the coming years.

We talked to Pat about pattern matching, first principles, how he thinks about the funnel at Sequoia, books he’s reading, and more.

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Episode Transcript

David:I am psyched to have Pat join us for this podcast here. I got to know Pat at HubSpot, where we worked together. I got to work with Pat and Pat was one of the most thoughtful people that I know. I might not know many people.

Dave:What is it about Pat? What makes him thoughtful?

David:A bunch of stuff which you’ll figure out on the podcast. One of the things that I thought would be interesting to talk about is Pat is relatively young or appears young to me, from what I could see. This podcast is all about accelerated learning so I was thinking how does Pat approach learning? We’re talking about this when you got here, about these new markets, especially as you come into an environment like Sequoia where people might be 20, 30, whatever years ahead not only in learning but in terms of pattern matching, they have history. How do you accelerate your learning there?

Dave:The theme that we talk about a lot is DC calls it reps and sets; you have to have reps and sets. I haven’t interviewed nearly as many people as he has so he’ll come on to the interview and know something already and I’m trying to figure out what is it. It’s like, well he has the reps and sets, you see this pattern matching over and over.

Pat:The pattern matching is something that we’re very careful about talking about just because—what’s interesting in the evolution of adventure investors is when you’re a couple years in, maybe two, three, five years in, you start to think that you know something because you’ve seen enough companies, you’ve met enough founders and you’ve seen stories play out. Thinking that you know something very quickly becomes dangerous because as soon as you think you know something, the next company you see breaks that pattern and you come to learn that it’s a little bit of motherhood and apple pie but it really is true that every company is unique because the company is nothing more than a collection of people inside the building, all of whom have unique DNA and in combination, all of whom combine to create very unique outcomes. We’re really careful about using “pattern matching” as anything more than context that we could provide to our founders so that they can make their own decision.

David:How do you systematically not let that bias sink in which is pattern matching is a bias, right? Do you just have to tamp it down everytime it shows up?

Pat:Pretty much. We talk a lot about trying to think from first principles because I think starting a company or being an investor has a lot of scaffolding that’s been built up around it over the years which is useful because in a lot of cases, that can help you shortcut to an answer as opposed to have to doing everything from first principles. But I think for us, when we invest in a new company, what we’re trying to only invest in what we would call sort of fundamental companies, meaning they have a chance to be independent for the next few decades. They have a chance to completely define a category and dominate that category and show the world something that the world didn’t know before they existed.

For those companies, a lot of that scaffolding doesn’t really matter because by definition, that scaffolding is conventional wisdom and conventional wisdom builds conventional companies. We just try to go back to first principles like what problem do you solve? Why is that an important problem? Are there really a lot of people who have that problem? What positions you to solve it in a unique and compelling way that won’t be easily replicated by everybody else who witnesses your success?

David:First principles are like one of these things that are so logical when you hear it but it’s so hard to apply in the heat of a deal or the battle, the heat of some competition or something like that, especially in your world, everything’s competitive.

Dave:Can you explain what first principles are in your context? For us, it’s like customer, company, then us. What does that mean for you from investment perspective?

Pat:First principle for us, in the context of the company it means that if you reduce it to its essence, why do companies exist? Companies don’t exist to make people rich whether those are the founders, the investors or anybody else. Companies exist to solve a problem. For us, the first principle is what is the problem you’re solving? How do you do so in a unique and compelling way that has some inherent durability to it?

For us, those sort of are the first principles. How that translates into sort of going after investment, one of the biggest things we look for is just authenticity in a founder because if somebody makes a list, here are the hundred businesses that maybe I can build, I’m going to try a couple of them, but maybe I’m going to settle on business number 37. That’s fine and there are probably a lot of situations where that ends up working out but you might not have the same level of passion in attacking business number 37 as you do when you attack it from when you’ve actually experienced and it really ticks you off. That problem exists and you just want to stamp it out of existence.

The authenticity with which somebody approaches their whole business, I think they can’t help but translate than into their employees and into their customers and then you have this ground swallow of enthusiasm that kind of propels your business forward.

Dave:I know a guy like that. There’s not really pattern matching. There’s not pattern match, well there is but it’s not an important thing for company perspective. What about from a people perspective and a founder perspective because we love talking about people and who’s behind the companies and the personal side of things? Can you pattern match on a founder level?

Pat:Yes and no. People talk a lot about product market fit and we think about product market fit but we also think about founder market fit, meaning a great founder to go after a top down enterprise market probably looks different than a great founder who’s going to build a consumer facing application. Sometimes the enterprise market is where that consumer facing application founder is actually better because you want to have frictionless bottoms up distribution, not 42 [00:06:34] parachuting into the CIO office.

We try to spot people who are a fit for the market that they’re going after and then I think we’d layer on top of that outlier characteristics which generally has some component of drive and ambition associated with it and then we try to layer on top of that. I guess I would call it moral compass or ethics or cultural sensitivity. If you have somebody who is not intentional about the culture that they’re building and the values that they represent as an organization, there’s going to be some point at which the entropy starts to take over and the organization starts to break. We always try to look for that too.

David:That’s interesting. You must have a weird problem at Sequoia and now your funnel is kind of maybe the biggest funnel or infinite, right? At the top. But there’s only a handful of companies that you’re going to bet on in a given year. I don’t know what that handful is. You must have the highest filtering problem.

Dave:It’s the biggest and smallest funnel. We wouldn’t be a very good marketing website. All the traffic and then very small.

Pat:I don’t know what it is from lead to investment but from first meeting to investment, it’s about 500 to 1, to give you a sense. What’s really interesting about this, I joined Sequoia in the beginning of 2007. I think at the time, we had call it a dozen investors and today I think we have 19 investors. We’ve grown by roughly 50% in terms of investors. Our funnel has probably grown by more than 10X. Crazy, because over those ten years—

Dave:There’s so many companies and technology.

Pat:Everybody is starting a company and I think that’s a persistent trend. One of the things that we’ve been grappling with over the last handful of years is this constant need to reinvent our own business not just in terms of who’s inside the building but also in terms of how do we operate, how do we use technology to our advantage so that the methods that Don Valentine used in the 1970s and the 1980s are not the same methods that we’re using today. We want to benefit from all of that wisdom but we want to also reinvent constantly so that we can deal with that funnel problem. We have a team of really talented engineers and data scientists.

David:Who work on your funnel?

Pat:Who work on automating as much of that as possible.

David:That’s amazing.

Pat:Identifying, filtering, coordinating, providing leverage to investors. We’ve got so much room to run and we feel like we’re just in the first inning of sort of reinventing our own business with technology but it’s something that we think about all the time.

Dave:How often are they servicing things to you before you’ve heard of them?

Pat:That’s a good question. A lot of times, it’s resurfacing. Meaning, it might be a company that we intersected a couple of years ago and didn’t get to business with for whatever reason and they started to take off and we were asleep with the switch and somebody in our technology organization finds it. We’ve actually made an investment in the last 12 months as a direct result of our data science efforts where they surface something that we’ve heard of but we weren’t really keyed into how important it was. They’re producing good leads for us every week.

David:That’s crazy.

Dave:That’s awesome.

David:In the shownotes I’m going to have a link to a YouTube video of a talk that Don Valentine did at Stanford at GSP. It’s amazing. I think I’ve watched it seven times.

Pat:Was this the Target Big Markets?

David:Yes! It’s one of those talks that I need to keep revisiting all the time just like let me watch this one more time.

Dave:Don is amazing. You want to talk about first principles, thinking Don Valentine… Fill people in who are going to listen we’ll be like, “Who’s that? What’s he talking about?”

Pat:Don Valentine is the founder of Sequoia in 1972. What was interesting about Don was he was not a financier, he was a chief marketing officer at that time in marketing when it meant everything associated with going to market. The founding premise of Sequoia was Don just saying, “Boy, I’m surrounded by all these brilliant engineers who know how to build great stuff but don’t necessarily know how to connect to human problems.” That was the genesis of our business and that’s kind of been what we’ve tried to stay true to over the last 45 years.

David:That’s amazing. That goes back to the authentic founders, big markets and then he talks about this thing of just target big markets. It’s so fundamental. I’m doing it injustice, you have to watch it and he’s funny, the way that he delivers it. It’s the thing that we always forget, entrepreneurs forget, it’s just the importance of targeting big markets.

Pat:It’s tricky though and it’s a little bit dangerous because I think anymore, you don’t target a big market from time zero. You target a very narrow, a slice of a big market and you earn the right to evolve your way into morbid over time. For us, as investors, one of the most common mistakes we make is we underestimate or under appreciate what a market can become when things start to work. As a result, we just don’t realize how exciting a business is the first time we see it.

David:It’s something that we talk about internally all the time. It’s just like our own go to market. It’s just like wedge. We’ve got to start with something easy, simple, everyone can integrate, it’s non-threatening. Non-threatening is the word that we use. Then that wedge over time gives us the ability to maybe rethink all this other stuff but we’re capturing the tiny little wedge in the beginning and then expanding over time. It doesn’t mean that we don’t have a big vision for where we’re trying to go but we need to find that little crack to get inside. We’ve been replacing non-threatening—it’s right in there.

Dave:In the wedge that you talk about a lot, it actually starts big and then you get to the wedge. You love the whole invert. Invert the problems, invert the challenges that we have and it’s okay. That’s the big problem. But what’s the easiest path for us to maybe get into that market or into that company? That’s how we started small.

David:How did you find your way into investing?

Pat:Good question. I went to Boston College.

Dave:B.C.?

Pat:B.C.

Dave:Legals. A lot of love out there.

Pat:Legals. I was at B.C. I actually started as a Physics major. I started Physics and Finance and the rationale was I liked Math and it seemed liked Business and Science are two places where you can apply Math. As I went on through school, I ran into the Physics lab and it just drove me crazy that like the Math that you could do didn’t necessarily work in the lab. I dropped Physics and ended up with Finance, Econ, and Math.

David:All the places with Math, the Venn diagram of Math.

Pat:Yeah. I went into investing right after college. I guess at that time, I kind of naively thought that Math was going to play a big part of it which it turns out, it plays almost no part whatsoever.

David:That’s great to hear.

Pat:What really intrigued about it was Finance and Econ kind of sends you down this path of the investment world rip large, whether that’s banking or working for a mutual fund or hedge fund or whatever the case might be. Within that world, it seemed like working with founders was at the very far end of the spectrum in terms of things that you could feel good about and tell your grandma what you do and have her say, “Oh, you help small companies. You make customers happy and hire great employees. That sounds good.” That’s what drew me into it originally. I was an investor straight out of school in Boston.

I was at a private equity/venture capital firm in Boston. Then I moved into Sequoia at the beginning of 2007 because Sequoia more so than any other organization out there has prided itself over the years on starting with founders who are really at ground zero and trying to wrap as many resources around them as possible to maximize the likelihood that their idea’s going to have the biggest possible impact.

David:That’s another part I loved about Don’s talk when he was talking about Jerry from Yahoo! and how they basically targeted those early founders and kind of built around them. Is he still around?

Pat:Don? Yeah. Don spends most of his time in Arizona these days. But he’s in the office every couple of months.

David:That’s crazy.

Pat:He’ll still drop in on a private meeting from time to time.

David:Checking in on you.

Pat:Don is amazing. He will sit without saying a word for two or three hours. He won’t talk unless somebody asks him for his opinion but if you ask him for his opinion, inevitably, you’ll get ten words or less that are more insightful than anything else that was said in the preceding three hours. He’s incredible.

David:Just quiet and just like, “How did he say that in ten words?”

Dave:I had a question that I wanted to ask you. You get this job at Sequoia. What is the actual process for you to get from Boston to Sequoia?

David:People are listening, they want to know the process.

Dave:Yeah, they want to know.

David:Secret process.

Pat:The truth is I got really, really lucky in a couple of different ways. One was in 2006, we decided that we’re going to start amping up our focus on growth stage investments. We actually got into that business in 1987 but it was kind of a side business for a really long time. In 2006, we looked around and said, “Well jeez, a lot of these companies that we get into business with at the early stages start to grow up and would prefer to work with us as opposed to working with other folks.” Also, there are plenty of companies that started outside of the Bay Area where we’re not as good at supporting companies at the very early stage that we’d love to intersect at a growth stage.

2006, we started amplifying this focus on the growth stage business which meant hiring a dedicated team and it turned out that the place I worked in Boston was one of the early category defining firms around growth stage investing. I was sort of in the right place at the right time in terms of what Sequoia was targeting.

Then how I got the job, my very first interview was with Doug Leone who at that time was responsible for the growth business and addition of a bunch of other stuff. Today, he’s responsible for all of Sequoia. I think I had a good breakfast with Doug.

David:The secret is there in the breakfast.

Pat:Doug just kind of ran around. I’m not convinced that anybody else likes me as much as Doug liked me.

David:You kind of paved the way.

Dave:He put a good word in.

David:That’s crazy. I love those stories. We all have those stories, just random. I have a similar story like how I got my—it was in Serbia at that time, how we got our first investment, my first company. I’m pretty sure I hired someone that this investor was trying to hire and they chose me over them. I think that was it.

Dave:Which company was this?

David:This is [00:18:14]. I had hired someone away that this investor was trying to learn to one of their companies. He’s retired now, this investor. I think that was it. I can’t explain it in any other way.

Dave:That’s awesome.

David:It’s crazy. Does growth operate separate at Sequoia now?

Pat:Very tightly integrated.

David:The model for everyone has been all over the map. Some people are totally separate on growth, some people are trying to integrate.

Pat:It’s very tightly integrated. I mentioned we have 18 or 19 investors. That’s everybody who does early stage and growth stage investing. The reason it’s tightly integrated, couple of reasons. One is the spec for both businesses is kind of the same. We’re looking for companies that have a chance to define and dominate a category over a long period of time. It doesn’t matter when we intersect them when it’s a person with an idea or a team of several hundred people that is going to go public in the next 12 months. Anywhere within that range, the business is the business. We just happen to be intersecting with different points along that spectrum.

The reason we have dedicated teams is the decision criteria for series A is very different than the decision for the growth stage investment when there are a bunch of unit economics and a bunch of financials and evaluation and all that stuff. The decisions are a little bit different. But what we look for in a company is the same.

Also, a lot of the company building itself is the same. Like a growth stage investment, there’s a lot of DNA that’s already taken shape but we tend to get involved with growth stage companies around that 150-ish Dunbar’s number, employee Dunbar’s number which is where everything kind of starts to break and where a lot of the VPs who got you there start to tap out. There’s still a lot of things that people look towards us to help with as the company scales. The fact that we do a lot of that in our early stage business really helps with the growth stage business in terms of just sharing some of those tricks in the trade.

David:It’s funny because we talked about that in past episodes. There’s these magic breaking point numbers in companies that unless you experience them, for some reason, it’s hard to explain. You cannot explain why these happen but they have the magic breaking points. Every company that I’ve been at, they seem to start to break at the same point in terms of account.

Dave:We had an awesome interview with Patty McCord who ran Netflix yesterday. She had an amazing thing. I can’t stop thinking about it. We asked her, “We’re right on 50 employees now. By the time you talk to us next, we’ll be 100, 200 plus. What advice would you give?” Her advice was like, “Don’t get caught up in nostalgia. Nostalgia can be the number one thing that will kill you. That is like employees that where there early being, “Oh, I wish it was like how it used to be.” That’s a really interesting topic that’s like very top of mind for us right now.

David:Why do you think those magic numbers exist?

Pat:That’s a good question.

David:I’m hoping for an answer because I don’t have one. I don’t know one. I just say they do.

Pat:I think 150 in particular—for anybody who’s not familiar with Dunbar’s number it’s basically the number of reasonably close human connections any given individual is capable of having and keeping track of. I think that applies to a company in the sense that 150 employees is right around that inherent ambient knowledge of what’s happening begins to dissipate and it’s overwhelmed by the coordination costs of keeping 150 people on the same page.

I think when there are 10 people in a room, you can hear everything that’s happening, it’s very easy to know that there’s a clear—not very easy, I shouldn’t trivialize it. It’s still hard, it’s just comparatively easier to have a shared vision about where the company’s headed and a shared understanding of how you’re going to get there at least over the next weeks or months or quarters.

150 employees, you start to not know everybody’s name. The employees who joined recently might have a totally different idea of why the company exists and where you’re hoping it gets. The only way you can solve that is through systems and culture and so it’s the point at which having actual management systems in place, I mean systems in the sense of technology but also in the sense of a regular cadence around meetings and what not and then culture in the sense that, at that point, if you’re not intentional about your culture, it starts to get away from you.

David:It’s funny, Patty yesterday said, “Are you still on the stand on the table phase? Where you can stand up on the top of the table and address everyone in the company or are you past the stand on the table phase which is very much this?” It’s definitely why I’m spending a lot of time on starting to document on a bunch of this stuff like and figuring out how we do onboarding and all that kind of stuff. Come 12 months, we’ll be hitting that Dunbar number or past that number. We need to be ready now of how we’re going to train people and even now when we’re having seven people starting at a time and that kind of thing.

Pat:I think the thing that you guys, the two of you are obsessed with is just because maybe something marketing related is in my hand or something sales related is in Arman’s head or whoever, that doesn’t do anybody any good for the next wave of the company unless it’s on paper, it’s documented, it’s part of the onboarding process.

David:It’s part of the process, the system.

Pat:It becomes a checklist and the whole ‘we’re obsessed with Bill Walsh’s book standard’ where he talks about the standard performance, how we ran the 49ers. Just having those checklists and having that process upfront is such an important thing. You guys are obsessed with that. Now, it’s like, how do we actually put that into play?

David:Since you look at so many companies, what would be your advice to young, budding entrepreneurs about how to think about their companies?

Pat:About how to think about their companies just in general?

David:Yeah. In today’s context. Let’s take a SaaS company for example, not a scientific-risk kind of company but just like a market-risk company like someone in SaaS or someone in software. How would you be thinking about that category now or that type of company now versus five years ago? What are the risks?

Pat:Good question. I guess, broadly speaking, and then maybe I’ll zoom in on SaaS a little bit. Broadly speaking, we’ve been in the same basic technology cycle since 2001 now. We’re 16 to 17 years in. Historically, these cycles have followed 14 or 15 year patterns. In some ways, we’re kind of overdue for the end of this cycle and the beginning of the next. What that means for a founder generally, is that what we would call the verruckt period—verruckt is a German word which means sort of insanity or craziness. What Don Valentine would’ve called the good theater that comes at the end of the cycle. The verruckt period is probably coming close to an end. That could be tomorrow, that could be five years from now. But it’s probably coming close to an end and the way that translates into the advice that we give founders is, don’t get caught up in the hype. Don’t try to chase the unicorn. Don’t raise infinite amounts of money just because it’s available.

Just try to stick to first principles because if your employees actually care about your mission and if your customers are going to buy your products regardless of whether or not their budget is big or small, you’re in a good spot. We would actually encourage people in most cases to raise less money as opposed to more, to be very deliberate about the hiring and try to stay away from the people who respond to the line, “We’re a fast-growing company” and go after the people who respond to the line, “We care about solving this problem. It’s hard but we think it’s worthwhile. If you agree, you should join us.”

David:We’re going to change our job descriptions.

Pat:I think for SaaS specifically, that’s also true because five years ago, there’s still a reasonably decent amount of white space in SaaS just in terms of buying centers within the enterprise that were underserved or SMBs for that matter that were underserved. I think today, there’s less white space so the companies that are cracking through are the companies that have come up with something that’s truly a superior value proposition. Either it’s more usable or it’s more pervasive or it’s more intelligent, whatever the case might be. I don’t think you can brute force your way into scale today the way you maybe could five, six, seven, eight years ago. Today, there’s just more competition, everybody’s got plenty of money and we’re kind of back to the basics of find the magic of product market fit and kind of iterate from there.

David:Those are wise words for you entrepreneurs out there.

Pat:It’s easier said than done.

David:I know. Everything is easier said than done. That is true. That is awesome.

Dave:We’ve got to ask Pat about learning before we go.

David:Okay.

Dave:Do you read a lot?

Pat:I do.

Dave:Tell us when do you read, what are you reading now and maybe books you recommend the most to people.

Pat:Great question. When do I read and what am I reading now? Well, anytime I travel, I end up getting a lot of good reading in. I do mostly read books as opposed to reading newsletters and that sort of thing. I’ll scan a bunch of different newsletters to try to get an awareness of what’s happening in the world, but I get a lot more out of spending an hour of reading one thing and really understanding it than I do out of snacking on 15 different things over the same period of time.

Dave:I love that.

Pat:Books that are worth reading. Well, we’re just talking about Extreme Ownership. I know that the listeners of your podcast have heard plenty of that.

Dave:We love it.

Pat:My partner Kevin Slemp at Sequoia is the one who recommended Extreme Ownership to me. He was also the one who recommended the book called The Boys in the Boat.

Dave:That’s a great one.

Pat:The thing that I love about The Boys in the Boat is actually towards the end of the story. For people who aren’t familiar with The Boys in the Boat, it’s about the 1936 U.S. men’s rowing team which went to the Olympics in Germany. This is a team consisting of a bunch of people from the middle of nowhere who really had no right to be in the Olympics but they just fought like heck and came together in the toughest of moments to earn their way there.

But the best part of the book is towards the end where they’re reflecting on what happened in the 1936 Olympics. At this point, the guys are 50, 60 years old and they do reunions every now and then. At one of these reunions, they realized that for the eight men on the boat, every single one of them thought that he was the weakest link. Every single one of them fought like heck because he didn’t want to let the other guys down.

David:That’s awesome.

Pat:I think that is just the ultimate statement of high performance culture and what we love to see in our own partnership or in the companies that we’re getting into business with.

David:Before you leave, hit up Pat on social media. We’ll have links to him on social media. Follow him.

Dave:Do you tweet?

Pat:Yeah. I tweet every couple of months.

David:Check out Sequoia. I bet you know them already. Leave us a six-star review. Apple will only allow five stars so far but we’re going six stars.

Dave:Tonight, we’re going out to dinner with a bunch of people that we want to be customers and customers. One of them just replied to me on the way down here and she said, “Can’t wait for dinner tonight. Six stars only.”

David:That’s it. Six stars only. In your review, leave a little story about Pat or a tip for Pat, or a book recommendation for Pat. We’re going to make sure he gets it. Thanks.

Pat:Thanks guys.

Can we continue the conversation?

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